Bond yield curves invert. A clap of thunder, milk curdles, global equity prices tumble. Turbulent financial markets are obeying the bond market’s scriptures. A US recession looms, prophets warn. Investors may challenge the creed. They should still heed the predictive qualities of yields.
Like summer storms, bond curve inversions are extreme events but not acts of God. Higher yields on shorter-term bonds than on longer-dated debt make sense when central banks are likely to lower interest rates in future. That would be the case if they will have to bail economies out of recession. Yields on two-year US Treasuries have nudged above those on 10-year bonds for the first time since the global financial crisis. Other parts of the curve had already flipped.
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